Technically a Horse: ETF, ETF, ETF

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Hello, and welcome to the Money Stuff Podcast, your weekly podcast where we talk about stuff related to money.

I'm Matt Levine, and I write the Money Stuff column for Bloomberg Opinion.

And I'm Katie Greyfeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.

Katie, we're talking about just one topic today.

Yes.

And that topic is: you showed a horse this weekend.

I was going to say ETFs, but yeah, we showed a horse.

We'll talk about ETFs.

Okay.

So, yeah, I did.

I rode my horse this weekend.

His name is Gus.

Yes.

He's about 15 hands for the equestrians in the audience.

Which is all of the audience.

After listening to the Money Stuff podcast.

That's a.

It's a

bad size movie.

It's a fine sound size movie.

It's a fine size.

So he is technically a horse.

The only

listen to me.

Listen to me.

The dividing line between a horse.

He doesn't think he's a person.

No, no, no.

He does have a personality, but the dividing line between a horse and a pony is just height.

Some people think it's age.

No, it's just height.

So he, for a while, because I got him before he turned three, like a couple months before he turned three, so he was still a baby and still growing.

For a while, I had a large pony, but he has grown to the point where he is now technically a horse, which we're very thrilled for him for.

So you are, on occasion, a competitive

horsepancer.

I am.

So I ride Dressage.

There's a thing called the United States Dressage Federation on my older pony whose name is Batman.

I've had him since I was 12.

Batman's a pony.

Batman is a pony.

Batman's a large pony.

Large pony.

Small horse.

But the line is fuzzier there because he's like 14-2 hands for the equestrians in the audience.

I got up pretty high in the levels with Batman.

We got up to third level.

It goes training like 13 hands.

Let me tell you about it.

Okay, we can cut all of this if it's boring.

Oh, no.

So when you

show dressage in the United States, there's intro level, there's training level, first, second, third, fourth, then you get into like Grand Prix and stuff like that.

I wish that the audience could see the wiggle

demonstrating what Grand Prix looks like.

I tried to embody the horse doing Grand Prix.

So with Batman, we got up to third level and we did pretty good.

Gus is just starting out.

This was his second show ever.

We showed training level.

He did a great job.

I will say I was so proud of him.

From Instagram, I got the impression that you and Gus

won.

We won a blue ribbon.

But for context, we're showing training level.

Like, I'm a pretty good rider at this point.

So it's like pretty easy.

And the classes were super small.

I actually posted that on my close friend story.

Oh, no.

I'm sorry.

It's totally fine because it felt a little bit embarrassing because it was such a small class and it's training level.

But Gus did a great job.

I'm so glad to hear it.

Yeah, he got a little bit scared.

The wind was blowing in a way he didn't like, but, you know, he was really brave about it.

So hats off to Gus.

It's so hard to be a horse.

It really is.

The wind is blowing the wrong way.

You have to understand, horses are flight animals.

They don't fight.

And the horse ancestors who survived were the really scared ones who started running at the first sign of danger.

So, I mean, it's written in their ancestral code to be scared of things.

I feel like there's a nice metaphor there or something.

I don't know.

Yeah.

So that transitions nicely to what we're talking about today.

Yeah.

Sadly, we're actually talking about ETFs.

Yeah, yeah.

Your other favorite topic.

You know, you would think I would be more excited about what what we're doing today.

I wouldn't think that.

But we're talking about some pretty nitty-gritty stuff when it comes to ETFs, at least one of the topics.

Yeah, we're talking about, I don't know, I guess we're talking about nitty-gritty stuff.

Well, we're talking about taxes and how to dodge them.

Yeah.

Yeah.

We're also talking about derivatives enhanced

exchange traded funds, which retail traders love because they're being hawked them on YouTube.

And then we're going to talk about Jane Street.

We're going to start by talking about Jane Street.

Let's start with Jane Street.

I forget how you described it.

They're like great vampire squid.

No, no.

They're like this secretive market maker that we read about all the time.

I do feel like Jane Street sort of went from nothing to extreme prominence in the course of my being aware of financial markets.

And there was a point where they were truly an under-the-radar, nobody had heard of them.

thing.

And now there are several chapters of a Michael Lewis book.

You know, this, you know, they represent 15% of stock trading or whatever the numbers.

So they're pretty big and they get a lot of articles about them because they're pretty interesting.

And each of the articles has to say they're very press shy.

And at this point,

you know, they're not that press shy.

The information's coming from somewhere.

Yeah.

But I feel like the press they get is good in the sense that it's like, look at these guys.

They make so much money.

And my first thought was like, that's got to be good for recruiting.

But of course, like, it's bad for recruiting.

There are a lot of people who want to to go into finance to make money, and you want to hire the other people, the ones who want to go into finance to like solve weird puzzles.

Yeah.

And like Jane Street, to be clear, I sometimes do puzzle hunts in New York City, really.

So what does that mean, Matt?

Yeah, it's a puzzle hunt.

It's a little bit like dressage, but no, you like, it's like a scavenger hunt, but like the clues are weird puzzles.

Is that like geocache?

I don't know what that is.

Okay, keep it.

It's like a scavenger hunt, but the complicated puzzle clues.

And it's a very financial industry thing.

And like you basically, you go and there's like eight teams from Goldman and like three teams from Jane Street and then like a bunch of other high-frequency trading firms.

And like it's always like Jane Street, like a big puzzle hunt firm, you know?

Like you go to Jane Street and do they dominate the puzzle hunts?

No, it's like pretty competitive, the puzzle hunts.

Cool.

I think they're good at puzzle hunts.

So it's like, you know, it's like real puzzle solving people.

If you develop too much of a reputation for being a giant lucrative pot of money, then you'll attract people who want the giant lucrative pot of money.

And those people,

you might hypothesize, will be worse at solving puzzles i wrote something like that and someone emailed me to say you're right i've known people who worked at jane street and like

early on it was people who liked puzzles and didn't like staying that late at work and then they made more money so they got people who liked money and want to stay later at work so the culture has deteriorated oh my gosh in the sense that people like work harder and make more money well i was going to say like how do you control for that in the interview setting well you ask them puzzles yeah

and you see if they're having fun.

Yes, a little bit.

That's funny.

Right?

You can't really, there's only so many puzzles you can do if you're not having fun doing puzzles, right?

Yeah.

If you're really good at all the puzzles and you and you like don't have that spark in your eye, you're still probably fine.

Right.

There's not a certain light in your eyes.

Yeah.

If you're just like grudgingly good at puzzles, you'll be okay.

Yeah.

You'll be fine.

Yeah.

Because the puzzles do result in money.

Yeah.

If you work at Jane Street, do you have to like trading ETFs?

No.

Okay.

Well, it seems like a lot of people at Jane Street do.

Yeah.

But like Jane Street is in the news because the FT had another like profile of them that had a lot of interesting facts and sort of quotes.

And they do quote their like head of fixed income saying basically like their business model is like they automate something and then they go up one level of abstraction and then they automate that so they can sort of do higher and higher, more complicated, more value-adding things by like automating all the stuff below it.

And like that's kind of the common pattern in equities trading for the last 20 years.

It is not really the pattern in fixed income trading.

And like Jane Street has been kind of pushing bond trading to be more automated.

But the point of that is that if you like solving puzzles and automating things, you don't have to care that much about trading ETFs because like, you know, you're like,

it's another puzzle.

It's like, you know, the computer is doing some amount of the ETF trading for you or like some of the pricing for you.

But it is clearly a place where people like

the psychological aspect of trading.

One of the better pictures of Jane Street comes from Michael Lewis's book about Sam Backman Freud who worked there for a while.

And it's a lot of like puzzles and people betting against each other and people learning the perils of adverse selection firsthand by like having their interviewers like trick them.

So, you know, it's a trading firm, but it's not like people whose first love is ETFs, like you.

Right, right.

So

talk to me about portfolio trading, where, of course, ETFs factor in mightily.

Portfolio trading is something that I write about every couple of years

and sort of relearn the mechanics of it every couple of years when I have to write about it.

I would say that I get it, but I don't understand it.

So portfolio trading is trading a portfolio of bonds.

Basically, it's like there are investors who will need to sell a lot of bonds at once, right?

Who like their thing is not like I'm going to like slightly adjust the exposure of my bond portfolio, but like I'm an endowment and I'm moving from 40% bonds to 30% bonds.

So I'm selling, you know, a giant pile of bonds.

And traditionally, you would do that.

You could call a bank and sell each bond and it would take a while because they'd price each bond.

And you'd sort of like pay a bid ask spread on each bond and it was like inefficient.

And people realize that trading a whole portfolio of bonds, you can price the portfolio itself rather than sort of think individually about each individual bond.

And in particular,

what people like Jane Street realized is like there are all these bond ETFs.

Bond ETFs, you can like hand hand in some bonds and get back shares of the ETF.

The bonds that you hand in

are going to be bonds that are supposed to go in the ETF.

There's a lot of flexibility to create shares of the ETF because a bond index ETF just can never exactly contain the index.

It's impossible to recreate a bond index precisely, like a big bond index.

There's a lot of bonds and like, you know, you can't buy fractions of bonds and like bonds are not always that liquid.

And so every bond ETF is going to have some sampling where they're sort of tracking their index, but they're not exactly the index.

What that means is like if someone wants to sell you a thousand bonds, you can go to an ETF and be like, I have this thousand bonds.

Would you like them in exchange for shares of the ETF?

And the ETF will like do some math and be like, yeah, we'll take 876 of those bonds.

And then you've just gotten rid of all those bonds.

And so Jane Street and like other bond market makers who are also ETF market makers can do this transaction where they will buy some pension funds, thousand bonds from them, and hold some of them on their balance sheet, but also squash a lot of them into an ETF, get back these like very easily tradable, fungible ETF shares.

And so they've like kind of turned this complicated problem of buying all these bonds.

They've reduced it mostly to a simpler problem of like selling ETF shares.

So it's a much more efficient way to do it.

And it's become a big part of bond trading in the last like 10 years.

And it's like very electronified.

People are doing it with computer models rather than like putting their finger in the air and trying to figure out how much each bond is worth.

Yeah.

It's like a move to like kind of equities like trading for bonds.

Yeah.

And it hinges on the creation and redemption mechanism that is inherent to ETFs.

I'm not sure it always, always does because, like, you could sort of have the same concepts and just hold the bonds on your balance sheet.

But yeah, in practice, like,

Bank Street doesn't have a huge balance sheet and is like using an ETF as kind of the balance sheet to buy the bonds.

My understanding, and maybe this is because I'm coming from the ETF perspective, is that portfolio trading picked up in a big way as bond ETFs did.

No, that's right.

That's right.

Yeah, that's right.

Yeah.

That's right.

It is very closely linked to ETFs.

I'm kind of surprised that portfolio trading isn't bigger, though.

I know it's becoming a bigger part of overall bond trading, but I think it's still in like single-digit percentage of overall bond trading.

I mean, why would you trade bonds?

Why would you trade bonds?

Like, you know, I've written about this a lot because I've been thinking about private credit.

Like, there's historically, you buy bonds, you know, like a 10-year bond.

You're like, I have a 10-year liability, so I'm going to buy a 10-year bond to match it.

And I'm just going to hold it for 10 years, right?

So why do you trade bonds?

I mean, one reason you trade bonds is because you are a pension fund that's like decided to, you know, move some of your allocation out of bonds or whatever.

But a lot of the reason you trade bonds is like you like a particular bond, right?

Like you're some sort of like credit fund manager where you are making some sort of relative value trade that one bond is good and one bond is bad.

And so then you're not, you're not like, oh, buy my hundred bonds at once, right?

But yeah, I mean, there are a lot of people who have needs to move whole portfolios, and that's become a big business.

Oh, let's talk about the fact that Jane Street doesn't have a CEO.

We've talked about this before.

I do love it.

It's so cool because, again, you think about this secretive trading firm, opaque, as the FT says.

I feel like the fact that they don't have a CEO and they're run by like this like faceless entity does kind of add to that image.

You know, they have like, they had like four founders.

Yeah.

I couldn't name them.

There's one guy who's still there who's like one of the founders.

And for a while, I just looked yesterday and he hasn't shot on LinkedIn or I couldn't find him.

But like for a while, his LinkedIn just said, like it had his name and it said like traitor at like quantitative trading firm.

It's like a top res like a top LinkedIn.

I was thinking about that when I was writing about the guy who has been suing David Einhorn or

months because he wants to call himself the former head of macro at Greenlight.

I love that guy.

And Greenlight is suing him and he's suing them and it's a mess and it's like really

good trolling.

And it's like

one way to live is to like sue to be able to call yourself the job title you think you deserve.

Another way to live is just a traitor on your LinkedIn.

Like it's a different, it's a different level.

But yeah, they don't have a CEO.

They run everything by committee.

I don't know.

Like I wrote this, like it's just, they give off the impression of just being like a group of buddies who'd like to solve puzzles together.

And like the puzzles create a lot of money for them, right?

It doesn't seem like a traditional hierarchical business organization.

Yeah, specifically, the company calls itself a functionally organized structure consisting of various management and risk committees.

Just amazing.

I mean, if this was a smaller company, I'd be like, I don't know.

I don't know how long that can last, but obviously they're doing well for it.

That feels like the sort of thing that can last more easily if you're a smaller company, right?

I mean, like, one thing in this FT article is like they've become really big.

It is harder to be non-hierarchical when you have that many people.

You know, a lot of how that business works is like they all trust each other.

And so there's not a real, you know, deep hierarchical supervision.

And that's harder to do if there's 3,000 people instead of 300.

And also, they make so much money.

And so all those people have grown accustomed to making a certain amount of money.

And the article is like, you know, they have one like even flat year and people are going to be really dissatisfied because, you know, you're sort of relying on the money growing every year to make everyone.

I guess why I would be skeptical with a small company is just because I would assume human ego comes in at some point where like one guy or gal wants to say, I'm in charge.

It's me.

I'm responsible for our success and I call the shots.

That's just as true at a large company, except that there's more people who might want to do that.

But I guess I'm saying obviously it worked for them, and now they're a large company, and it's still working.

Is there any conditions under which

where this couldn't work for Jane Street?

Oh, yeah, I mean, sure.

When it happens, we'll talk about it.

Yeah, yeah, yeah.

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Let's talk about

taxes.

There's a really interesting ETF filing this week, the Cambria Tax Aware ETF.

And Matt, what you were describing with portfolio trading, where, you know, this big institution comes with this like big basket of bonds, maybe random bonds, and they give them to

a Jane Street and then they get ETF shares in exchange.

That's kind of like the process of this ETF.

And I have to say, I'm not familiar with, not that familiar with swap funds or exchange funds, but this is basically those, but in the ETF wrapper.

Maybe you can make heads or tails of this.

Yeah, so a swap fund is like

conceptually, you have like a big, undiversified stock position.

For instance, you work at a company and you own a lot of your own company stock.

And you want to get out of that position and like get into an SP 500 fund, right?

You want to diversify and sort of have a more normal, diversified portfolio and not just own your own company stock.

The natural thing to do is you sell the stock, you buy an S ⁇ P fund.

But when you do that, you pay taxes on your stock.

And if it's, you know, if you've owned it for a long time, it's appreciated a lot, you pay a lot of taxes.

People figured out is like,

if you contribute property into a partnership, I mean, you form a partnership and you get back shares of the partnership, this is not taxidized.

But that is

make it.

So that's not a taxable transaction.

So like you don't have any gain.

You don't have to pay any taxes.

You just get shares of the partnership.

And when you eventually sell your shares of the partnership, you pay taxes.

And so what people do is like they get 10 tech company employees of different companies and they all put their shares into a pot and they get back ownership, like partial ownership of the pot.

And so now instead of owning their undiversified share in their own company, they own like a slice of shares of 10 companies.

And so they have a more diversified portfolio.

And these ETF guys realize you could do that in ETF where basically you go out to like a bunch of retail investors who have portfolios at like Fidelity or whatever where they own not like a bunch of ETFs, but they own like, you know, Tesla and Berkshire Hathaway and whatever, right?

Yeah, and they can all plop that into a pot and get back, and the pot is an ETF, and they get back shares of the ETF.

And now they go from having a like fairly short list of holdings to having a more diverse, like a share of a more diversified set of holdings.

And they don't pay taxes.

So the part that sort of breaks my brain is the CTF, the ticker is taxed, which is a great ticker.

I can't believe that that hasn't already been used.

Expected to launch in December.

So it's going to run a strategy that favors value and quality shares with low or no dividend yields to avoid being taxed on those payouts.

So

what people come to them with, the stocks that they own, aren't necessarily the stocks that are going to be in the CTF.

I guess that's right.

I mean, unless they're soliciting people with specifically value and quality shares.

Well, I think they are.

There are some limitations on,

you know, you need to have a certain amount of diversification in your portfolio already.

So there are limits on what you can bring in.

If you come in with like, I only have Tesla, they'll say no.

Yeah.

But yeah, they can, they can rotate out of stuff.

We talked on the podcast a couple of weeks ago.

I was like, I used to own like all index mutual funds and then I've moved to ETFs because they're tax advantages.

Very small.

I actually got emails about like, what are the tax advantages?

The tax advantage is like when someone puts money into an ETF, the ETF doesn't go buy like the underlying stock.

And when someone takes money out of the ETF, the ETF doesn't sell the stock.

There's this weird creation, in-kind creation redemption mechanism where like Jane Street goes and buys the stock and like contributes it to the ETF.

And the reason for that is like there's like these weird old tax rulings saying that if you do it in this way, the ETF doesn't incur capital gains taxes on the stock that it gets rid of because it's not selling it.

It's getting rid of it in kind.

And so

people in the ETF world are very focused on like never selling stock.

So, you know, if you contribute stock to this ETF, the ETF might want to rotate out of that stock into something different, but like they can't sell it.

Now, that's not necessarily a problem because as like Bloomberg's Zach Miter has written about, there is a mechanism for an ETF to say, I don't want to own this stock, I want to own that stock.

And basically, what will happen is like, you know, a Jane Street, an authorized participant, will come to it with the stock it wants and hand that in in a special creation basket to get new shares.

Yeah.

And it'll take out a redemption basket of the old shares so that you can, it's called a heartbeat transaction.

Oh, God.

And it's a way for them to avoid ever selling stock.

So that's a long answer to your question.

Yes, they can move from what people put in to what they want, but they have to do it through these in-kind creation and redemption transactions because the goal is to never pay taxes.

Not never, but

defer taxes.

I mean, that's my understanding is that, again, you can bring them whatever.

I mean, not quite whatever, but yeah, and then they magic it into value shares.

Yeah, I'll also say, I wrote this, like much like with the bond ETFs, they don't have to have an index and then like match that index exactly, right?

Like, they can, you know, if you bring them stuff and you're like, yeah, this is pretty valuey, then they can just hold that, right?

Like, it doesn't emulate the spirit.

They don't need like zero tracking error to whatever index they have because like they're giving you something else, right?

They're giving you this like tax advantage.

So like, yeah, if you have like a little tracking error, it's fine.

I do wonder.

So the idea is like they're going to have these investors with these stocks coming to them.

I want to know like how are they soliciting these people to come to them?

Is this like a build it and they will will come situation?

Do they have people lined up already?

I wonder how much sort of chumming of the waters that they've done.

Yeah, I don't know.

My sense is that this is like an advisor's product, right?

Like, this is like a thing that you can go out and pitch to financial advisors and like, oh, that's a great idea, right?

And then, like, the financial advisor has like a cool thing to tell her client.

You know, like if you want to diversify your like portfolio of six stocks, here's a way to do it without paying taxes.

Like, that's a cool piece of value-added advice for the advisor to give the client.

It's not necessarily something that you

watch a YouTube tutorial about and then do it, right?

Are you trying to transition us?

I think I'm trying to transition us.

Well, I have a few more things, okay?

So, in the same way, like, I wonder how many people like they've already lined up, or maybe they launch and then they go out to the financial advisors, et cetera, or maybe they're already in touch with that network.

It's interesting and fun to think that you and I could go just buy shares of this ETF for what reason.

I don't know why we would, but

because it's an ETF, anyone can buy it.

They have no control over who actually owns this thing.

Yeah, nor do they care.

I mean, they'd love it if just more people bought it.

But wouldn't that be weird if they did?

A little weird.

I mean, my assumption is it's like any other equity.

I don't like the tilt towards value, right?

I'm just wondering if you just want to own a value ETF and be like, this one's performance is good.

Maybe you have a thesis that is like the people whose accounts at Fidelity have a lot of concentrated, appreciated positions are really good investors and this ETF will somehow attract their really good portfolios and it will have a it will have a better portfolio through like the wisdom of the crowd of people with

yeah maybe

it isn't it does it's a little shaky I would say

I just I wonder about the retail investor who's you know going through on I will tell you that if you're just like browsing you know Robin Hood and you see a thing with a ticker tax like that's pretty good yeah you might you might just buy it Exactly.

I like tax.

I like not paying taxes.

Yeah.

I am fascinated.

So again, according to this article written by Justina Lee and Vildana Heyrick, this is expected to launch in December.

I am so interested to see how big it gets, if at all.

I don't know.

It's interesting.

First of its kind in ETF land.

You do need people to buy it.

Yeah.

Like, I guess the point of it is actually to let people transform their portfolios into diverse portfolios.

Yeah, like that.

Portfolios.

And then hold it for a long time and not pay taxes.

But eventually you want to be able to sell the thing, right?

But I imagine that's where the bulk of its asset growth will come from.

Yeah.

And those people will be sort of buy and hold investors because their whole purpose is to not pay taxes.

Yeah.

You don't need anyone to buy it.

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So how about YouTube?

I mean, I don't know if anyone's going to be pitching tax on YouTube.

Maybe though.

But anyway, this isn't a good segue.

Help me out, Matt.

I feel like mine was good.

What do you got?

So the tax ETF thing is interesting because, like, as I said, it does kind of feel like a financial advisor product, right?

It feels like the sort of thing that like you're like, oh, I want to diversify.

And your advisor's like, wait, let me show you something.

A lot of ETFs are almost the opposite of financial advisor products.

They're like a way to

let anyone with like a Robinhood account buy a thing that

you could historically have gotten from a financial advisor.

And so if you're like in a sort of like somewhat upper tier financial advisor relationship, they will sell you all sorts of weird derivatives if you're willing to listen.

And these are called structured notes.

And there's actually like a recent court case where like a founder of a big tech company, his like wealth advisor at like First Republic, put all of his money into like these terrible structured notes that like paid like 5% fees.

And like,

you know, they're like four-year notes and they kept rolling them every nine months because they want to get new fees.

That business,

people,

there's some skepticism about that business.

But anyway, you can get like all sorts of weird derivatives from your financial advisor in the form of structured notes.

But historically, you could only get that from like your financial advisor.

You couldn't just go out in the market and buy all these weird derivatives.

And ETF people realized that they could sell a lot of these weird derivatives to people in the form of ETFs and that people had a deep hunger for that and would go on YouTube and watch videos about like

buy-right strategies where you like, you know, buy some stocks and then you sell call options every month.

you get you you know as they say earn yield on the stocks yeah which like anyone in like options world will get really angry if you say you earn yield by selling options because that's not a yield.

Yeah.

But people do it.

Or like, you know, there's like, we've talked, I think on the podcast about buffer ETFs.

We have.

Which are like, you buy a stock and you kind of collar it or you buy the S ⁇ P and you put a collar on it.

So you can't lose that much money, but you also can't make that much money.

Yeah.

And there's other stuff, you know, like levered ETFs, which we've also talked about, are just, you know, they're essentially derivatives products.

And

you can sell all that stuff to retail.

you can package it into an ETF, and then anyone who wants to can buy it.

There's a guy in a Bloomberg article saying it's like potato chips, it's like sneakers, anyone can buy it.

Yeah, which is not historically true.

A lot of like you know, products that financial advisors sold, yeah.

And so, they talk about like democratizing access to this stuff.

That before, you have to have an advisor, you know, you had to have a relationship with a bank.

Now, you can click a button on your Robinhood account.

And

the downside of that is like you might wonder, do people know what they're getting?

getting?

But

one,

they can read Reddit and watch YouTube where people will tell them probably at great length what they're getting.

And two,

again,

this business as a financial advisory business does not have an unblemished reputation.

Like some number of financial advisors also wouldn't tell their clients what they were getting, but they would be rubbing their hands together about the 5% fees.

And then like clients would get blown up on these things.

So it's like, yeah, you know, you buy like the lower fee,

you know, relatively more transparent ETF version of it.

Like, that's not so bad.

Yeah.

There's some great reporting in this article too, because Denise Seikova and Vildana Hyrich, again, wrote this piece.

So they watched all the YouTube videos.

They, you know, scraped Reddit, et cetera.

They found 38-year-old Todd Aiken.

He has a growing YouTube channel that promises to teach followers how to feed off these lucrative ETF payouts in a diversified portfolio.

I let the dividends replace my nine to five.

That's the motto.

I live and die with the results.

So I was surprised.

Dividends are

dividends.

It's technically

technically a horse.

They're technically dividends in that they are dividends from the ETF, but they are not like stock dividends.

They are

option selling.

Let's talk about that a little bit.

I mean, they did quote some people who were criticizing that.

And one of the big criticisms of these is that it's return of principal, right?

Is the fancy word for it?

It's not return of principle either.

What is it then?

Is it return of capital?

Is it return of capital?

But what I'm...

Yeah, sorry.

As a tax matter, it might be return of premium.

I don't know actually.

But like, you know, a lot of these ETFs, what happens is that like every month you get a 10%

cash distribution and also the value of the thing goes down by 11%.

Yeah, it's a return of capital.

But what it is, is it's option premium.

Like you're selling options every month.

And like if the options move against you, then you lose more money than you made.

But like you get paid for the options.

Yeah, well, to that point, they have a great example in here.

You take a look at the Yield Max Coin Option Income Strategy, ETF.

It's based on Coinbase, I believe.

It sent more than 100% of its current share value back to holders as cash in the past year.

That's despite the fact on a total return basis so far in 2024, it is trailing Coinbase itself.

And it's down in absolute terms, too.

Yeah.

Coinbase is up.

This thing is down.

But does the end investor care if they're getting cash back in some form?

like they're getting a payout in some form do they really care if it's not

they're getting back less than they put in like it's their yield is more than 100 of the current stock price but it is less than 100 of the stock price a year ago they've gotten back less than they put in yeah

well that's what i struggle with and i don't know if i want to keep this in but like i listen not yield yeah it's option premium like you buy a stock right you sell options on the stock so you get paid

five 10% of the value of the stock in option payment, right?

Then, if the stock goes up, you don't get most of the gains of the stock going up because your gains are capped at the option, because you're selling out of money call options.

If the stock goes down, you take that entire loss.

You do this every month, right?

So every time the stock goes down, you take the entire loss.

And then you sell options struck at like whatever, 10% above the current price.

And so if the stock goes down, you sell options struck below where you started.

Okay.

And then if the stock goes back up,

you don't get back to where you started.

You do get some option premium.

You do this over and over again.

And you have a very volatile stock like Coinbase, where it goes down a lot, you lose money.

It goes up, you don't make all the money back.

Keep doing this.

You keep getting the option premium every month, which is valuable, but you lose much of the appreciation of the stock and you bear all of the losses of the stock.

And over the course of a year, Coinbase goes up, you don't get most of the gains, but you do get the losses every time it goes down.

And you end up making back less than you put in, even though you're getting paid option premium every month.

But I guess like that

option premium every month is enough that these people keep buying because these things have exploded.

They are so popular.

Well, this is like a classic strategy, right?

I mean, like, this is buy writing, right?

It's like you buy a stock and you sell call options.

And I was thinking about like one reason this thing exists is like you can just do that yourself.

But if you do it yourself, you have to sell like a hundred share, you know, options contract is 100 shares.

And so you have to buy 100 shares of Coinbase, which is like, you know, $17,000, $18,000.

And so this is, you know, you can buy one share of this ETF if you want.

And so do you get the same exposure for a lower dollar amount?

So

it is a popular strategy, but it,

you know, people talk about it as a volatility dampening strategy, which it kind of is because you get the premium every month.

But it's like when the stock goes down, you don't, you're not really asshilled except whatever.

I do like that they quoted Hamilton Raynor in here.

So he manages Jeffy, which is like the JP Morgan equity premium income ETF.

Which is a totally normal buy rights.

He started this whole craze, one of the things that really contributed to the boom in these types of ETFs.

And he's so funny because he's kind of old school.

Like he managed these types of strategies in mutual funds and then brought them over to the ETF wrapper.

They have been enormously popular.

And it's become this like Frankenstein's monster sort of situation because obviously he doesn't like things such as the yield max coin option income strategy ETF.

And he's quoted in the story saying that like not everything needs to be in the ETF wrapper, et cetera, et cetera.

And these types of funds are a good example of that in his view, of what doesn't need to be in the ETF wrapper.

But why not?

You know, like

this particular strategy feels a little gambling-y, right?

This is a little bit of like a, you know, like a retail day trader gambling product.

But if people want that exposure, like, why should they have to trade 100 share lots of options?

Why not do it in ETF form?

Yeah.

I don't know.

Yeah.

Let the people trade.

You know, like the people selling these things talk about democratizing these financial products.

And

I don't love these products.

Like, I wouldn't buy any of these things, you know.

But like, that's just me.

Like, it's so clear that there is a demand for this stuff.

And you don't want to be too dismissive of it because it is people like watching YouTube videos and like learning about this stuff.

As someone who like grew up in the world of equity derivatives, it's impressive how like widespread knowledge of equity derivatives has become in the you know world of reddit right there's like some truth to the idea that this is like democratizing sophisticated investing strategies now they're not always good investing strategies right

and that was the money stuff podcast i'm matt livine and i'm katie greifeld you can find my work by subscribing to the money stuff newsletter on bloomberg.com and you can find me on bloomberg tv every day on open interest between 9 to 11 a.m.

Eastern.

We'd love to hear from you.

You can send an email to moneypod at bloomberg.net.

Ask us a question and we might answer it on air.

You can also subscribe to our show wherever you're listening right now and leave us a review.

It helps more people find the show.

The Money Stuff Podcast is produced by Anna Mazarakis and Moses Anda.

Our theme music was composed by Blake Maples.

Brendan Francis Noonan is our executive producer.

And Sage Bauman is Bloomberg's head of podcasts.

Thanks for listening to the Money Stuff Podcast.

We'll be back next week more stuff.

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